Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
90 Cards in this Set
- Front
- Back
|
What is a trust?
|
an arrangement under which the trustee holds legal title to property for the benefit of the beneficiaries.
|
|
|
What are the requirements for a trust?
|
creator (settlor)…delivers…legal title of trust assets (the res)…to trustee…for the benefit of beneficiaries…with intent to create trust…for a valid purpose (can't contravene public policy).
|
|
|
What is delivery and when is it necessary?
|
requirement does not apply to self-declaration of trust ("I hereby declare myself trustee…") or testamentary trust (terms appear in testator's will). But for inter vivos trust with third party as trustee, there must be delivery of subject matter of the trust.
|
|
|
T's will contains a bequest of $100,000 "to A to be used for the education of Pete and Repeat." Does A hold the $100,000 in trust for T's two children?
|
Yes.
Intend a trust when we place legal title in one person's name with a duty to manage for others. |
|
|
Compare: "To A, it is my wish and my desire that he look after X and Y"
|
No. Prefatory Language of Suggested Use. A's money to do with what he wishes.
|
|
|
Compare: "it is my wish and my desire that he use the income for the support of X and Y until both have attained the age of 18 at which time to distribute the principal of this gift to X and Y outright."
|
Yes - clear intent to require the use.
|
|
|
T's will contains a bequest to BANK as trustee for the benefit of daughter Jean, "provided, however, that should Jean ever marry, she shall forfeit her entire interest in this trust." Is this a valid arrangement?
|
- The trust is good, but the forfeiture condition is void because it is an unreasonable restraint on marriage and therefore contravenes public policy.
|
|
|
Compare: In trust "to pay the income to my husband Mark until such time as he remarries; thereafter principal to my daughter Jean." Valid condition?
|
Yes - purpose is fundamentally different. Not to prevent him from marrying, but to provide for him until he does.
|
|
|
Compare: "I make no provision for my son Peter because I disapprove of his marriage outside of our religious faith."
|
Not a problem because it wasn't a condition. Declining to provide initially for any reason does not go against public policy. Just can't give and then take back pursuant to some reason.
|
|
|
What is the res?
|
The corpus, the principal, the subject matter of the trust. Necessary for a trust to exist.
|
|
|
A owes B $10,000. In writing, A states: "I hereby declare myself trustee of the debt which I owe to B."
|
- This writing is an attempted self-declaration of trust.
- Has A created a valid trust? No, A has not segregated out any specific interest in property. A duty to repay is not property. |
|
|
What if, on the above facts, it was B who stated, "I hereby declare myself trustee of the debt which A owes me, said trust to be for the benefit of C." Valid trust?
|
Yes.
Choses in action and accounts receivable are interests in "property." They are sufficient to support a trust even though they are intangible. |
|
|
Grandfather tells Uncle that he is leaving Whiteacre (an apartment building) to Uncle in his will. Uncle thereupon records a Declaration of Trust: "I declare myself trustee of my interest in Whiteacre, income to Nephew for life, remainder to his issue." Valid trust?
|
No, Uncle's claim is NOT a recognized property interest. It is an expectancy. When Grandfather writes the will, Uncle has no claim or property right. Uncle's expectancy will ripen into a property interest only if (i) Grandfather dies without changing his will and (ii) the will is admitted to probate. Until then, the law views Uncle's actions as a gratuitous promise to create that trust in the future.
|
|
|
After the facts above, Grandfather dies and his executor deeds Whiteacre to Uncle, pursuant to the will's terms. Does a trust arise at this time?
|
No, unless sometime after that time Uncle reaffirms his intent by word or conduct.
Restatement of Trusts: Where a promise to create a trust is gratuitous (i.e., not supported by consideration), a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor (Uncle in our case) manifests an intention then to create the trust. |
|
|
Does a trust fail if there isn't a trustee?
|
No. Court will appoint a suitable trustee.
|
|
|
When won't a court appoint a suitable trustee?
|
Powers Personal to the Named Trustee - if the court finds that the settlor intended for the trust powers to be personal to the trustee, such that the trust should fail if the named person is no longer capable of serving, then the trust would terminate.
|
|
|
Ann is the residuary legatee under the valid will of her deceased aunt. Before the taxes and other charges against the estate are known, Ann in writing declares herself trustee of her interest as residuary legatee for the support of her husband and all such children as she should have by him. Thereafter, $1million is distributed by the executor to Ann as residuary legatee. Valid trust?
|
Yes. Where the testator has died, although her estate has not been distributed, a legatee has more than a mere expectancy; she has an interest which may be the subject matter of a trust or a gift. This is true even though the amount which the legatee is to receive has not yet been ascertained, as where she is a legatee of the residuary estate.
|
|
|
F writes trust instrument naming X as trustee and providing that during F's life, the income, if any, from trust property is to be distributed to F, and at F's death, the income is to go to Wife for life; remainder to F's children. F does not transfer any assets into the trust but instead names the trust (i.e. Trustee "as trustee") as a beneficiary under several of his insurance policies. Has a valid trust been created?
|
Yes. Statutes or case decisions in NC and most states provide that an otherwise empty trust is valid if it is named the direct beneficiary of a life insurance policy or a pension plan death benefit.
|
|
|
What must a private trust have?
|
Ascertainable beneficiaries.
|
|
|
What do charitable trusts require?
|
Charitable purpose & reasonably large/unidentifiable group of people.
|
|
|
T's will left $100,000 "to my friend Lemuel Mosely, in trust for my friends." Valid trust?
Can this instrument be given effect as a valid power of appointment? |
No - "friends" is not an ascertainable class of beneficiaries.
Majority rule is that it cannot! A trust, invalid for want of definite beneficiaries cannot be given effect as a power of appointment. The property is returned to the Settlor's estate by resulting trust (implied reversion). But there is a minority view (NC!) so the special power of appointment argument should be made. It's a special power of appointment if the appointer cannot appoint the money to himself. |
|
|
T's will creates a testamentary trust for the benefit of her descendants, with the shares of each left to the discretion of the trustee. Valid trust?
|
Yes, if the class itself is defined, the distribution can be left to the members.
|
|
|
T's will left $250,000 to Bank as trustee, "to pay over the income and dividends to train spiritualistic mediums." Valid trust?
|
Yes, if it’s a charitable beneficiary, otherwise no.
|
|
|
12. When Vera Rich learned that her nephew Tom was to be married, she was so pleased that she transferred $100,000 to the Reliable Trust Bank to be held in trust for "Tom's future children." Unfortunately, nephew Tom was jilted within the week by his fiancee, and Vera died shortly thereafter. Valid trust?
|
No living beneficiaries, but not a problem.
Guardian ad litem appointed to enforce. If no children are ever had by Tom, the $ reverts to Vera's estate. |
|
|
13. Father devised $5,000 "in trust" to Daughter "as trustee," to spend the principal and income for the care of Father's 3 dogs. The rest of Father's estate was devised to Son. Daughter spent $1,000 during the first three years for that purpose after which time she discontinued that use saying she believed she'd keep the remainder of the "trust money" for herself.
Valid trust? |
This type of trust is called an honorary trust. Not for humans or charities.
|
|
|
What does NC recognize honorary trusts for?
|
Animals are valid for lifetime of the animals
Graves are valid for 21 years |
|
|
T placed her business realty in revocable trust, naming herself and her son Charles as co-trustees and designating herself as the sole beneficiary of the income from the trust for her lifetime. The trust further provided that on T's death the trust property was to be held in further trust for Charles' daughter Betty. T later executed a will devising her residuary estate "to the trust of which I am co-trustee with my son Charles."
What is this an example of? |
Pour over clause.
|
|
|
What of the fact that T was both trustee and beneficiary?
|
No problem. While the sole beneficiary of a trust cannot be the sole trustee, (who would sue the trustee for a breach of trust?), this rule doesn't apply: (i) if there are two trustees, even though one of the trustees is the sole beneficiary; (ii) if there are two or more beneficiaries, even though the sole trustee is one of the beneficiaries.
|
|
|
Are revocable trusts valid?
|
Yes, by statute in some states and by case law in almost every other jurisdiction, such trusts are valid even though the settlor retains the right to revoke, alter, or amend the trust, keeps an income interest or other interests in the trust as beneficiary, retains a power of appointment over the trust corpus or retains every day control over the trust either by naming herself trustee or by retaining veto power over the trustee's decisions.
|
|
|
Is the gift by will to the revocable, amendable (Pour Over Clause) trust valid?
|
Yes. Almost all states have adopted the Uniform Testamentary Additions to Trust Act or its equivalent. The only requirement is that the trust must be in existence before or executed concurrently with the will. The devised property is added to the trust as it exists at T's death, including any amendments after the will was executed, even though the trust amendments were not executed with testamentary formalities.
|
|
|
T places $15,000 in savings account at First Main Bank. The signature card and passbook bear the statement, "Tom Testator, trustee for Seth Testator." This is his only account at the bank. Over the years he draws out the interest on the account but leaves the principal amount intact. Some years later T dies, leaving a will (executed after the account was created) that provides: "I give all my property, including my bank account at First Main Bank, to my daughter, Dolly." Who takes the $15,000?
What is this bank account called? |
This bank account is called a Totten trust. It is revocable during life by any manifestations of intent to revoke including withdrawals. The account is reachable by the depositor's creditors during life, and in NC, it may also be reached after death to the extent the depositor's probate assets are insufficient to pay his creditors. Extrinsic evidence is admissible to show a trust was not intended despite the designation on the signature card.
Majority rule: a totten trust can be revoked by the depositor's will. Thus, Dolly takes the $15,000. |
|
|
S promised his widowed sister Marie that he would provide a home for her and her daughter Angie if Marie would keep house and serve as hostess in his home. Thereafter, in the presence of witnesses, S handed his brother Frank a deed naming Frank as grantee (with no mention of a trust), saying "Hold this property in trust until Marie's death, then convey to Angie. This is in consideration of services rendered by Marie as agreed." If Frank is unwilling to perform this oral trust, may he be forced to do so?
|
Yes. Oral inter vivos trusts of either real or personal property are enforceable provided the terms of the trust can be established by clear, satisfactory, and convincing evidence.
|
|
|
When can't oral inter vivos trusts be enforced?
|
to the extent they deal with real property, declarations of trust and transfers in trust for the benefit of the settlor must be in a writing that satisfies the Statute of Frauds.
|
|
|
T orally agreed with her valet Sydney that she would devise her home to him if he would forgo any weekly salary and remain in T's employ as long as she lived. Sydney fulfilled his commitment, but T never inserted a provision in her will for his benefit.
What are Sydney's rights? Suppose the agreement had been written? |
- Agreement is unenforceable because will contracts must be in writing with consideration.
- He can sue in quantum meruit for value of his work. Now he can get the home and the remedy is through constructive trust. |
|
|
T dies leaving a will that devises Greenacre to Jones; the will makes no mention of any trust. T's secretary now alleges that T orally told Jones that Jones was to hold the land as trustee for the secretary's benefit, and that Jones agreed to serve as trustee. Can the secretary enforce the promise?
|
Majority Rule: Yes. More precisely, her testimony is admissible to show the existence of the promise. If she is able to establish Jones' promise by clear, satisfactory and convincing evidence (more than a mere preponderance), a constructive trust will be implied for her benefit. Since a will and not a deed is involved, the Statute of Frauds is inapplicable. Equity's concern that one should not be allowed to be unjustly enriched in violation of his promise outweighs the Statute of Wills concern that the will beneficiaries should be identified by language in the will. A constructive trust is imposed to prevent unjust enrichment.
North Carolina: older cases holding no constructive trust on these facts. |
|
|
Same will provision except T never told Jones about any trust. Accompanying T's will is an envelope marked "Personal," addressed to Jones. Inside is a typewritten note, signed by T, instructing Jones to hold the land in trust for T's secretary.
|
Jones wins in all states.
|
|
|
T's will devises land "to my good friend Sam Smith, as trustee, for purposes I have already communicated to him." Smith is willing to identify T's purposes and intended beneficiaries and willing to serve as trustee. T's heirs object, saying no valid trust was created. What result?
|
Smith holds on a resulting trust (implied reversion) for T's heirs. The semi-secret trust situation involves no element of wrongdoing so to impress the trust for benefit of intended beneficiaries would violate the requirement of the Statute of Wills that the beneficiaries be identifiable from the language in the will. Smith may not even voluntarily comply.
|
|
|
What are the four rules for charitable trusts?
|
1. Not subject to either Rule Against Perpetuities or Rule Against Accumulations.
2. Must be for a charitable purpose 3. Must be in favor of a reasonably large number of unidentifiable beneficiaries. 4. When specific charitable purpose becomes unlawful, impracticable, wasteful, or impossible to accomplish, can be reformed under the doctrine of cy pres ("as near as possible"). |
|
|
Man who lived across the street from Shenandoah Grammar School died leaving will that devised his estate in trust: Trustee to accumulate income for twenty-five years. Thereafter, on Monday before Easter and again on Monday before Christmas in each year, trustee to distribute the income to grammar school students in first and second grades, "the said income to be used by them for educational purposes." His nearest kin, a second cousin, challenges the trust.
Valid charitable trust? |
It's not what the trust say, but how it operates in fact. No mechanism for enforcing the charitable goal.
|
|
|
Compare: What if the instrument stated: "the trustee shall expend the income for the educational needs of the grammar school students in the first and second grades." Valid charitable trust?
|
Yes
|
|
|
Trust providing scholarships at FSU for all residents of Southwest Tallahassee, FL, whose last name is Powell. Valid charitable trust?
|
No, because it doesn't likely benefit enough people.
|
|
|
Trust created by Iris Smith to provide scholarships at the University of Chicago for all residents of Cook County whose last name is Smith, with preference to be given to those persons named Smith who are related to her.
Valid charitable trust? Assuming the trust is charitable, who has standing to enforce it? |
Potentially -- probably benefits enough people. The preference clause is not fatal to the trust. Are only relatives benefitting? If yes, then it’s a private trust.
NC - the settlor while still living, the attorney general of NC, or any other interested party. |
|
|
Residuary estate devised to testamentary trustee, "to distribute the income to agencies and organizations, as selected by the trustee, actively engaged in research for the prevention of poliomyelitis." Twenty years later, the cure for polio is found and all organized research pertaining to the disease is terminated. The trustee petitions the court: What should it do with the trust income and principal? T's heirs intervene: Since the purposes of the trust no longer can be accomplished, the trust should be terminated and the corpus distributed to them. Result?
|
The heirs lose. Trust reformed into new charitable use as near as possible to the original.
|
|
|
T creates a trust with income required to be distributed to Sam for life; remainder to Sam's son.
Sam and the Trustee have a falling out and the Trustee stops distributing the income to Sam. What are Sam's rights? Sam wants to sell his income interest. Can he? Sam runs up a large bill at Sears. What are Sears' rights to satisfy their claim out of the trust? |
- Sue for order compelling trustee to distribute income. If trustee refuses, sue to remove him.
- Yes. - No right to get actual trust assets because Sam doesn't own them. Sears can get court order diverting flow of income to them until the bill is paid. |
|
|
S transfers one million dollars to trustee to pay the income to S's son Aaron for life. On death of Aaron, principal is to be distributed to Aaron's child ©. Trust provides that "No interest of any beneficiary herein shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary's creditors." Aaron builds an expensive home for $500,000 signing note for purchase price. In performance of the obligation, Aaron assigns to the payee $50,000 yearly for eight years out of trust income. Three years later Aaron instructs the trustee to make no more payments to the creditor. The creditor sues Aaron and seeks to enforce the assignment or to reach Aaron's interest in the trust. What result?
|
Out of Luck. In NC, spendthrift clauses are enforceable. Can get after the $$ once it's transferred to Aaron. (exception child support)
|
|
|
Suppose the spendthrift clause was drafted to preclude involuntary alienation only?
|
Against public policy. Has to preclude all alienation.
|
|
|
M's will devised Blackacre to Trustee, "to apply the income for the support of my husband, Mr. M, during his lifetime to the extent necessary in the discretion of my trustee; remainder to my son." Trustee now holds Blackacre and has accumulated income of $5,000. She has been notified of the following claims. Advise her concerning each of these claims.
|
- Discretionary Support Trust.
M has right to be supported by income of this trust if he's in need. |
|
|
Mr. M, gainfully employed, demands payment of the $5,000 income
|
Trustee doesn't have to distribute because M isn't in need.
|
|
|
Grocery demands payment of $180 food bill of Mr. M
|
Pay only if M can't
|
|
|
Jeweler demands payment of $24,000 for a rare Rolex watch sold and delivered to Mr. M
|
This isn't support -- it's a luxury. Don't pay regardless.
|
|
|
Same as 27, except instrument read: "to accumulate or distribute income to my husband, Mr. M, in the sole discretion of my trustee…" (i.e. no standard of "support")?
|
- Pure Discretionary Trust
- M has no right to any distributions. Can't compel them. Right to honest trustee, acting in good faith with proper motives. |
|
|
Same as 27 (discretionary support trust) or 28 (pure discretionary trust) except it is a creditor of Mr. M who is trying to reach his "interest" in the trust?
|
No luck, M can't compel. Exception for child support.
|
|
|
D transfers stock to a revocable inter vivos trust, the terms of which provide that the income and principal may be distributed to D and other members of his family "as Bank, in its sole discretion, deems advisable for their comfort and support." The trust instrument also contains a spendthrift clause. D runs up some bills that he is unable to pay. What are the creditors' rights?
|
In NC you can't put assets in a trust for your own benefit to avoid creditors.
|
|
|
As to trusts for the benefit of the settlor:
|
- Spendthrift clauses are unenforceable so the creditor can reach any right to distributions D has in the trust.
In addition, D's creditors may reach the actual trust property if D has the power to revoke the trust OR (even if he doesn't) if the trustee has discretionary authority to make distributions to settlor. |
|
|
As to irrevocable trusts for 3d persons, settlor's creditors have no rights. Exception?
|
Exception - Fraudulent transfers doctrine: if trust was created with intent to avoid known creditors, trust can be set aside.
|
|
|
Residuary estate devised to trustee includes 500 shares of Acme stock. Considering the stock to be an inappropriate holding for the trust, the trustee sells the stock to itself at its market price on the date of sale. (The stock is listed on the NYSE so there is no doubt about its value.) The stock goes up in value; what are the trust beneficiaries' rights?
|
- Can trace and recover stock for benefit of the trust.
a. Trustee cannot buy or sell trust assets to itself b. Trustee cannot borrow trust funds c. Trustee cannot sell assets from one trust to another trust d. Corporate trustee cannot purchase its own stock as a trust investment. (But it can retain its own stock if a part of the original trust property -- provided it is a permissible investment. Must meet the "prudent investor" investment standard.) e. Trustee cannot engage in any transaction in which she seeks to secure a personal gain. |
|
|
What is the prudent investor rule?
|
except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions.
|
|
|
What are the elements of the prudent investor rule?
|
□ Duty to keep trust productive
□ Duty to balance return with potential risk □ Duty to diversify investments □ Duty not to commingle |
|
|
What is the portfolio view in NC?
|
a trustee's compliance with the Prudent Investor Rule is measured using a portfolio view. That is, the fact that one or more assets held by the trust are underperforming is not a problem as long and the total return (income and capital appreciation) of the overall portfolio is reasonable.
|
|
|
What is the Duty to Preserve and Protect Trust Property?
|
in addition to investing prudently, this duty frequently means that the trustee must insure trust property against casualty losses.
|
|
|
What is the Duty of Impartiality?
|
absent a trust provision permitting trustee to prefer one beneficiary over another, a trustee must be fair and impartial to all beneficiaries.
|
|
|
What is the Duty to Account and Inform?
|
a trustee has a duty to account periodically (e.g., annually) to the beneficiaries and to keep them reasonably informed about the administration of the trust.
|
|
|
Green, Grey, and Gary are co-trustees appointed under the will of Jackson. A clause in the will provides that "my trustees shall have the power to lease, mortgage and sell any real property held by them in trust." Green, enters into negotiations for a lease of trust property.
May Green enter into the lease alone or does he need Grey and Gary's signature? |
Needs at least one, but not both. Majority rule.
|
|
|
During the lease negotiations, Grey tells the other two trustees that he wants to resign, may he do so?
|
- Yes provided he gives written notice to the settlor (if living), his co-trustees (if any), and all qualified (i.e., living) beneficiaries.
|
|
|
If Grey does resign, must Green and Gary secure the appointment of a new co-trustee to replace him?
|
Only if the instrument requires
|
|
|
Suppose the instrument states that there are always to be three trustees. Who has the authority to appoint a successor to serve in Grey's place?
|
- Unanimous agreement of living beneficiaries, otherwise court determines.
|
|
|
Breach of Trust: whenever trustee breaches fiduciary duty (self-dealing, improper investment, etc.) beneficiary has a choice of options:
|
□ He can ratify the transaction and waive the breach (e.g., trustee invests entire trust in highly speculative Wildcat Oil stock that later goes up in value, "Thanks for doing such a good job of investing").
□ He can sue for the resulting loss. Name of the action is surcharge. Breach of a fiduciary duty is an automatic wrong: good faith, reasonableness is no defense or justification. The only issue is the measure of damages (e.g., difference between what he paid for the "speculative" Wildcat Oil Stock its is worth at the time of suit). □ In self-dealing cases, he can "trace" and recover the property for the trust (e.g., trustee borrows trust funds and invests the proceeds, if value of purchased property goes up in value, beneficiary can claim the property for the trust). |
|
|
What is an exculpation clause?
|
a clause relieving a trustee of liability for breach of trust is unenforceable to the extent it relieves the trustee of liability for reckless or bad faith actions or the clause was drafted by or at the direction of the trustee and the settlor was not represented by independent counsel).
|
|
|
33. Sam and Bill were co-trustees of a trust which specifically limited trust investments to certificates of deposit. Without consulting Bill, Same invested half of the trust corpus in X stock and other half in Y stock. The value of X stock tripled in two years while the value of Y stock declined. Overall, Sam showed a much greater return than a bank C.D. could have earned.
Any problem for Sam? How about Bill? |
- Yes - each breach is judged separately.
- No unless there is an element of fault. (e.g., Bill participated in the breach or he failed to use reasonable care to prevent it, or he neglected to take proper steps to compel his co-trustee to redress the breach.) 2 years since the breaches - clearly he hasn't been keeping an eye on Sam and compelled him to address the breach. |
|
|
Assume that before the facts above are discovered, Sam resigns. Pursuant to the terms of the trust, Diedra is appointed successor co-trustee. Diedra reviews the trust records and discovers the above information. Any problem for Diedra?
|
No unless there is an element of fault. (e.g., she continues the breach or she fails to take proper steps to compel Sam to redress it).
|
|
|
F creates irrevocable trust naming close friend T as trustee. Because T was not in trust business, and because he was busy in the operation of his own business, T asked his nephew N ("who knew a little about trading securities over the Internet") to manage the trust. N invested the trust funds in such a manner that they declined in value by $25,000. Is T liable for the acts of his agent, N?
|
No unless T improperly delegated responsibility to his agent, N. Under the Uniform Prudent Investor Act, a trustee may delegate the investment decision provided the trustee exercises reasonable care, skill and caution in (i) selecting the agent, (ii) defining the scope and terms of the delegation, and (iii) periodically reviewing the actions and decisions of the agent.
- Our facts: failure to use reasonable care in selection of the agent. |
|
|
Would the answer change if T had notified the trust beneficiaries that he was going to hire nephew N to administer the trust?
|
- No, although a beneficiary who consents to or participates in a breach of trust waives his right to sue, mere knowledge of a breach (in the absence of affirmative consent) is not enough.
- Related Rule - as long as a trust is revocable, a trustee who acts with the consent of the settlor cannot be sued for breach by the beneficiaries. |
|
|
What is the basic idea of trust accounting?
|
the income beneficiaries get the net income while the remaindermen are entitled to trust corpus at the termination of the trust. Thus, items of receipts and expenditures must be allocated to the correct account: income or corpus (i.e., principal).
|
|
|
What are receipts?
|
interest, rents, dividends on stock paid in cash are all income. So too is 10% of any amounts received as an annuity or mineral royalty. Proceeds from the sale of trust assets, stock splits, and dividends paid in stock are principal.
|
|
|
What are expenditures?
|
ordinary expenses incurred in the production of income (e.g., repairs, interest, taxes, etc.) are charged to the income account. Extraordinary items, capital improvements and income taxes incurred on the sale of trust property are charged to the principal. The trustees fee is charged half to income and half to principal.
|
|
|
What is the Power to Adjust in NC?
|
Under the Revised Uniform Principal & Income Act, a trustee has the power to adjust the normal classification rules above (e.g., classify some capital gains as income instead of principal) if it is necessary to comply with the trustee's duty of impartiality.
|
|
|
T is the trustee of a trust that directs that all trust income is to be distributed to A for life with principal at A's death to be distributed to B. T has concluded that a prudent investor would select investments with the objective of maximizing total return (ordinary income and capital appreciation). If T's decision to invest for total return results in investments that produce significant capital gains but little or no ordinary income, what advice would you give T to avoid a claim by A that T has breached his duty of impartiality?
|
Has to use the adjustment power to re-characterize some of the capital gains as income.
|
|
|
A settlor, acting alone, can revoke, terminate or modify a trust if
|
(i) the instrument does not explicitly state that the trust is irrevocable, and (ii) the settlor substantially complies with all provisions in the trust instrument pertaining to the form that the proposed action must take (e.g. in writing, delivered to trustee, etc.)
|
|
|
Most States: beneficiaries, all of whom are sui juris, can terminate a trust only if
|
(i) all beneficiaries consent, and (ii) there is no further trust purpose to be served. By all beneficiaries we mean all beneficiaries. Interest in minors or unborn beneficiaries precludes termination. Claflign Doctrine.
|
|
|
What is the law in NC relating to reformation?
|
a trust instrument may be reformed by a court to remedy a mistake of law or fact (e.g., a scrivener's error) or to effectuate the settlor's continuing tax objectives for the trust.
|
|
|
Resulting Trust (equivalent of a reversion):
|
(i) may arise upon failure of express trust or when express trust purposes accomplished and corpus not exhausted:
§ Semi-secret trust case under Majority Rule § Trust of ten million dollars to build hospital wing. The wing is built for eight million dollars. Trust instrument silent as to this contingency. Excess two million dollars may be returned to settlor by resulting trust. Express trust fails for any reason and trust instrument silent as to what happens in this event. (ii) purchase money resulting trust: presumed to arise when consideration for purchase of property is paid by person other than the person taking title. Defenses: (1) gift; or (2) loan. |
|
|
A loaned $10,000 to B. Just after obligation becomes due, A says to B, "Instead of paying me the money, I want you to acquire the title to Blackacre and hold it for me." B orally agrees. B acquires Blackacre taking title in her own name. Later, while A is overseas, B trades Blackacre to C for Whiteacre. When A returns from overseas, Blackacre is worth $25,000 and Whiteacre is worth $12,000. B is insolvent.
Can A impose a trust on Whiteacre? Can A impose a trust on Blackacre? |
a. Yes
b. Maybe not because of Bone Fide Purchaser Rule. |
|
|
What is the rule regarding sale/exchange of a resulting/constructive trust to a BFP?
|
a sale or exchange by a trustee of a resulting or constructive trust to a BFP for value cuts off beneficiary's rights to the transferred asset. BUT, trustee holds any consideration received on the transfer in trust for beneficiary AND if the sale is not to a BFP, the beneficiary has choice of remedies: (i) impose trust on consideration received by trustee or (ii) impose trust on original asset in NON-BFP's hands.
|
|
|
Same, except that under the terms of the original agreement, B was to purchase Blackacre for A, but she has to have title issued in A's name. B fraudulently had titled to property issued in her own name.
|
Exempt, same result, but now it's a constructive trust.
|
|
|
What are constructive trusts?
|
implied in a variety of circumstances where a person acquires title to property wrongfully. Trust implied to remedy unjust enrichment.
- Title to property acquired by fraud, misrepresentation, duress, or mistake. Secret trust case |
|
|
Tom died in 1995, leaving a will that bequeathed property in trust: "to pay the income to my daughter Dana for life, and on her death to distribute the trust principal to such persons, including Dana's estate, as she appoints by her last will. If Dana does not exercise this power of appointment, on Dana's death the trustee shall distribute the trust principal to Dana's descendants." In this scenario:
|
Tom is the donor of the power of appointment; his will created the power.
Dana is the donee of a general testamentary power of appointment. • It is general because she is not limited in the class of beneficiaries to whom she can appoint. More precisely, she can appoint the property to "herself, her estate or the creditors of either." • It is testamentary because she is limited to appointments by will. She can not exercise (or contract to exercise) during life. - Dana's descendants are the takers in default. They will take the property on Dana's death if the power of appointment is not exercised. |
|
|
Dana dies in 2004 leaving a will that bequeaths her residuary estate "one-half to my husband and one half to my son."
Did the residuary clause in Dana's will operate to exercise her testamentary power of appointment, even though her will made no reference to the power? Will the property in the trust be subject to a claim by Dana's creditors? |
Question of intent. By presumption, she did. Rebut presumption by showing she didn't know she had the power.
No. Dana does not own the property only the power to say who does. |
|
|
Trust to pay the income "to my daughter Beulah for life, and on Beulah's death to distribute the trust principal to such of Beulah's descendants as she shall appoint by a will that specifically refers to this power of appointment. In default of appointment, to Beulah's siblings in equal shares."
|
Beulah has a life estate and a special testamentary power of appointment. Can't appoint to estate, herself, or creditors.
|
|
|
Beulah dies several years later, leaving a will that bequeaths "all my property, including any property over which I have a power of appointment, half to my son Stan and half in continuing trust to pay the income to my daughter Diane for life, principal at her death to Charity." Die Beulah's will exercise her special testamentary power?
|
She generally referred to it. Presumptively no. Must specifically refer to it.
|
|
|
Assume Beulah did attempt to exercise her power by making a specific reference to the power in her will.
Is the appointment of the income interest to Diane valid? How about the principal interest in Charity? |
Yes. In NC both general/special powers may be exercised to create income or other interests in new or existing trust.
No, charity is beyond the scope of her power and void. |
